The Malaysia-Indonesia MalaysiaRemittance Corridor

Making formal transfers the best option for women and undocumented migrants

East Asia Social Development Unit Financial Market Integrity Unit (FPDFI) The World Bank

Content
Global Remittance Trends Indonesian Migrants: Vulnerability and Use of Remittances The Malaysia-Indonesia Migration and Remittance Corridor Transfer of Remittances Implications for Policy
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Global Migration Trends: The number of migrants continues to increase

More than 190 million people or about 3% of the worlds population are living in countries in which they were not born IOM (2005) notes that:
There is a shift in destination countries A rise in undocumented labor flows An increasing feminization of migrant workers

In 2005, East Asia and Pacific Region accounted for $45 billion, or 17% of global recorded remittance inflows Indonesia has 4.3 million citizens working overseas mostly in Middle East and Asia Pacific. Migration is increasingly feminized and increasingly undocumented.
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Global Remittance Trends: Recorded remittance flows continues to increase

$ billion
275 225
FDI Private debt and portfolio equity

175 125 75 25 -25

Recorded remittances

ODA

Global Remittance Trends: Poverty Reduction

Evidence from a few household surveys shows that remittances reduce poverty Cross-country evidence shows that a 10% increase in per capita remittances leads to a 3.5% decline in the share of poor people Remittances also finance education and health expenditures, and ease credit constraints on small businesses

However, qualitative evidence suggests this may not be the case in Indonesia

Indonesian Migration
In 2005, remittances were estimated at US$5.3 billion, making remittances the second highest forex earner after oil and around 1.5% of GDP This is lower than China ($22 billion) or Philippines ($14 billion) 680,000 workers left on contracts in 2006, almost 80% were women, 88% of whom work in informal sector and come from poor rural areas

Map: Migration and Remittances in Indonesia

Vulnerability of Tenaga Kerja Indonesia (TKI)

TKIs migrate primarily for financial reasons, but migration is risky for several reasons: Indonesian laws and regulations exacerbate migrant vulnerability (concentrate power in recruitment companies) Malaysian laws and regulations weaken position of migrants (e.g. employers retain passports) The cost of migration is high and migrants must borrow to finance migration Lack of institutional framework and capacity for effective monitoring Little or no accountability mechanisms Weak support mechanisms for migrants in sending villages and destination places of work

Indonesian Migrants: Use of Remittances

Estimated 45% of wages earned are sent back as remittances to families Remittances used to pay debts, and for day-to-day living and consumption expenses of family left behind, for house building and improvement, and luxury consumer goods Fewer migrants invest in health and education, or in productive activities There is rarely a plan for investment of remittances and migrants have little control over the use of remittances while they are away (although they regain control when they return) Families become dependent on remittances, and with few sustainable livelihood improvements, migrants get trapped in a cycle of migration

Main Challenge: How can the impact on poverty reduction be improved and sustained?

The Corridor: Major Destinations for Indonesian Migrants

350,000 Saudi Arabia 300,000 250,000 number of migrants 200,000 150,000 100,000 50,000 UAE 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Malaysia

Taiwan

Hong Kong

Kuwait

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The Corridor: Indonesian migrants in Malaysia

Malaysia is second highest recipient of Indonesian migrant workers after Saudi Arabia and the number is increasing 17% of Malaysias workforce are from overseas: more than 60% of these are from Indonesia Approximately 1.3 million documented and 700,000 undocumented Indonesian migrants worked in Malaysia in 2006 60% of documented Indonesian migrants in Malaysia are women Undocumented workers travel without visas, overstay visa/work permit, change jobs without necessary procedures They have no legal protection and are often exploited by Malaysian employers due to their illegal immigration status

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The Corridor: Remittance Characteristics

Fees to secure jobs can be several hundred dollars Other formal costs borne by domestic workers migrating from Indonesia to Malaysia total about $340 Monthly salary between $145 and 200 for domestic workers Average remittance amount is estimated at $115-$150 per transaction In 2005, Indonesia received about $5.3 billion (IMF) in remittances of which about $2.7 billion was from Malaysia Only about 20% total remittances arrive in Indonesia through formal channels, and even less - about 10% of remittances arrive in formal channels from Malaysia

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The Corridor: Remittance Trend

While the number of documented TKI in Malaysia have been increasing, the remittances sent to Indonesia through the formal system decreased both in real terms and as a percentage of total remittances Outflows to Indonesia as a percentage of the total decreased from 35 percent in 1997 to 13 percent in 2006
2,500

2,000 Grand Total millions of US$ 1,500 Other 1,000

500 Singapore 0 1997 1998 1999 2000 2001 2002 2003 2004 United States

Indonesia

2005

2006

Source: Bank Negara Malaysia, based on bank and RSP reporting

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The Corridor: Disparity in formal and total remittance flows

6 5

Billions of US$

0 Total remittances leaving Malaysia Remittances from Malaysia to Indonesia Remittances reaching Indonesia from Malaysia Total remittances into Indonesia

Calculated from migrant stock

Recorded through formal channels

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Transfer Mechanisms
Costs and risks of remitting funds are considerable in proportion to TKI salary Bank channels make up 90 percent of formal channels, but represent a slim percentage of total remittance flows An unregulated industry has arisen to facilitate remittances in situations where remitting funds through formal channels is difficult This industry includes account mediators, migration agents or agencies, and informal channels that are part of formal enterprises (money changers)
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Transfer Mechanisms Contd

Migrant workers especially undocumented ones have more incentives to use informal remittance channels Returned TKIs have a generally clearer understanding of the costs and benefits of the different channels of remitting funds Financial literacy among TKIs is low

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Comparing Incentives of Remittance Channels

Remittance Channels
Bank
Access without ID Geographic coverage in Malaysia Relative price of fees Speed Language Barrier Minimal Paperwork Source: World Bank

Postal (money order)

no

MTO

Money Changer
yes

Informal Channels
yes

no

no

limited

good

limited

unknown

good

Incentives

variable

inexpensive

expensive

inexpensive

unknown

moderate-slow

slow

fast

fast

variable

variable

variable

variable

variable

none

no

no

no

yes

yes

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Migration Costs
Annual Cost of Migrating and Remitting Funds for an Indonesian worker in Malaysia
construction plantation domestic work

average monthly salary a average salary for a year average amount remitted in one year b

170 2040 918

80 960 432

157.5 1890 850.5

average migration cost c yearly remittance cost (to send from Malaysia) d yearly remittance cost (to receive in Indonesia)

-475 -7 -20

-363 -7 -20

-343 -7 -20

total cost
a. b. c. d.

-502

-390

-370

Average salary for a year was found by taking the average monthly salary in US dollars (provided by the Malaysian Ministry of Home Affairs) and multiplying by 12 Average amount remitted is based on Bank Indonesia estimate that a TKI remits approximately 45% of his or her salary Average migration cost and yearly remittance costs (in US dollars) are based upon World Bank primary interviews with TKI and RSPs Salary yearly remittance cost is based upon the assumption that workers remit twice a year through bank channels 18

In Summary
The number of migrants to Malaysia is increasing, increasingly feminized, and many undocumented migrants Migrant workers are increasingly choosing non-formal means to transfer remittances because:
Identification: they cant meet the requirements Access: they ( or the recipients) cant reach the banks easily Cost: High cost of remitting through banks Competition: other means of transfer are more responsive to their needs

However, qualitative evidence suggests that improvements are needed for remittances to have a greater impact on poverty reduction Possible security implications of large flows of unrecorded remittances

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Avenues for Policy Consideration

I. Make the formal sector accessible and responsive to migrant workers, while recognizing the need to establish basic requirements for transparency and regulation, through:
Enhancing Security and Reliability of Identification
Strengthen the reliability of passports by ensuring the same number is not issued and by assessing the use of biometric information (ie. fingerprints etc) Issue new ID cards for migrants, recognized by both countries and financial institutions

Promoting Customization of Products and Organizational Structures

Encouraging banks and postal systems to develop financial products tailored to TKIs New rules allowing Malaysian money changers to act as RSPs should be tailored to their economic and institutional capacity

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Avenues for Policy Consideration

II. Facilitate migrant workers access into the formal sector, via:
Expanding Financial Education
Financial Literacy Programs could be implemented at the predeparture stage in Indonesia, and when foreigner cards are issued in Malaysia Awareness raising programs for female TKI, through employers of female TKI and leaders of TKI communities, to promote empowerment and financial literacy

Ensuring Better Assessment Techniques of Data and Regulatory Changes

Longer period of observation to comprehensively assess market responses to recent regulations adopting new registration system for RSPs in Indonesia Improved data quality, gathering and reporting procedures, to expand existing knowledge of available data to create better informed policy choices for TKI

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Avenues for Policy Consideration

Involving Relevant Development Actors to Facilitate Migration
MFIs and NGOs could be convinced to finance migration for formal and informal TKIs, under the condition that only formal transfers are used for future remittance transfers Collateral for Migration could be guaranteed by local communities

III. Formalize and regulate the informal providers, while maintaining their accessibility to migrant workers, through:
Enabling strategic partnerships between formal and informal remittance service providers
The enhanced private sector participation would reduce transfer costs and expand remittance flows Account mediators should be part of the formal channel for distribution because these informal operators access rural communities in Indonesia where no banks have a presence Recent regulatory legislation allowing individuals and informal corporate entities in Indonesia to legally provide remittance services should be properly monitored and implemented

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Thank You for Your Attention!